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Eight Forex Terms You Should Know About Before You Start Trading
  • 04 Jul
  • 2017

Eight Forex Terms You Should Know About Before You Start Trading

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If you are not much into Forex Market, then you might come across a lot of terms which you may not have heard ever before. There are some terms which can be misleading for beginners who have no prior knowledge or experience of the forex trading.

Check out the list below of the most common and basic terms of the forex trading market:

Forex

Forex is nothing but a group of traders conducting trillions of dollars’ worth of currency trade 24 hours a day and 5 days a week. Currencies trade over the counter and there is no centralized market place for forex, unlike other financial markets of the world.

Currency Pair

When two types of money are traded for one another, it is known as currency pairs. There is no unilateral standard for what a particular currency is worth, hence, the market keeps on moving upwards or downwards constantly against one another. 

Spread

The difference between the buying price and the selling price of the currency is known as the Spread. Simply put, if the currency you hold has a higher number than the currency you are trading for, you will make a profit by that number difference. Although, if the case is that you hold the lower number currency than you are about to trade for than you will incur a loss.  

Pip

It is the smallest unit on the forex market. Some currencies have four digits to the right of the decimal point- the last one is the pip; however, it is different for other different currencies.  For example, in Japanese Yen, the pip is the second number from the decimal point.

Leverage

‘Leverage’ in general term simply means borrowed funds. It is widely used in trading financial assets such as equities and forex. Basically, leverage is a loan provided by the broker to an investor, who handles the forex account of the trader. It is advised that leverage should be used very carefully as it can lead to heavy losses as well.

Margins

Margin in forex trading is something which is often misunderstood by people. Margin is a sort of good faith deposit put up by the trader. It is a portion of your account equity allocated as a deposit, and not transaction cost.

Trade size determines the amount of margin needed to hold open a position and the margin requirement increases as trade size increases.

Stop Loss

Stop loss is considered the best friend of any trader. It helps in reducing the significant losses due to the sudden fluctuations in the forex market. A regular stop loss stays where you set it, but a trailing stop loss moves along with the market. If the market favours the trade, it locks down the profit until the market flips back in the opposite direction. A trailing stop loss needs no regular adjustments and allows comfortable, profitable, and safe forex trade. 

Long Versus Short

In forex world, a week is considered a long time. A trader is said to be going long in the trade when the trader buys with the goal of selling it at a higher price later on. Traders rarely keep positions for several months, however, when a trader is going short in a trade, they sell the currency with the intention of buying back the currency at a lower price.

Closing it Up

A good knowledge of these few basic terms is a must to have any kind of success in the forex market. A successful trading strategy is highly debatable, but trading without the knowledge of the terms above, the only thing you will know well is LOSS in the forex market.

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